Exam 6: Deductions and Losses: in General

Bonnie sells her personal use SUV for $22,000 (adjusted basis of $38,000).Her realized loss of $16,000 ($22,000 - $38,000)can be recognized for income tax purposes.

Taylor,a cash basis architect,rents the building in which his office is located for $3,000 per month.He commenced his practice on March 1,2010.In order to guarantee no rent increases during an 18-month period,he signed an 18-month lease and prepaid the $54,000 on March 1,2010.How much can Taylor deduct as rent expense for 2010?

Some expenses that are necessary are not ordinary and,therefore,are not deductible.

Susan rents part of her personal residence in the summer for 10 days for $1,000.Anne rents all of her personal residence for 3 weeks in December for $2,500.Anne must include the $2,500 in her gross income whereas Susan is not required to include the $1,000 in her gross income.

The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes.

LD Partnership,a cash basis taxpayer,purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building.The gross receipts of the partnership are less than $100,000.LD must capitalize the $50,000 paid for the land,but can deduct the $150,000 paid for the building in the current tax year.

Melvin is engaged in an illegal drug-running operation.Which of the following expenses will reduce Melvin's taxable income?

Briefly discuss the disallowance of deductions for capital expenditures.

Mattie and Elmer are separated and are in the process of obtaining a divorce.They incur legal fees for their respective attorneys with the expenses being itemized as follows: Although there is no requirement that he do so,Elmer pays Mattie's lawyer as a gesture of the positive feelings he still has for her.

Sandra owns an insurance agency.The following selected data are taken from the agency balance sheet and income statement prepared using the accrual method. Calculate Sandra's net profit using the cash method for 2010.

Describe the circumstances under which a taxpayer can receive rent income from a personal residence,but does not have to report it as gross income.

The cost of legal advice associated with the preparation of an individual's Federal income tax return is not deductible because it is a personal expense.

Are all personal expenses disallowed as deductions?

While she was a college student,Juliet worked in a bookstore located near campus.She thinks a bookstore located on the other side of campus would be successful.She incurs expenses of $18,000 (accounting fees,marketing survey,etc. )in exploring its business potential.Her parents have agreed to loan her the money required to start the business.What amount of these investigation costs can Juliet deduct if: a.She opens the business in July 2010. b.She decides not to open the bookstore.

Are there any exceptions to the rule that personal expenditures cannot be deducted?

For an expense to be deducted,the amount must be paid by the taxpayer.

During the year,Larry rented his vacation home for 180 days and lived in it for 16 days.During the remaining days,the vacation home was available for rental use.Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?

Under the "one-year rule" for the current period deduction of prepaid expenses of cash basis taxpayers,the asset must expire or be consumed by the end of the tax year following the year of payment.

Irene and Jim own an unincorporated bakery.They determine their salaries at the end of the year by using the amount required to reduce the net income of the bakery to $0.Based on this policy,Irene and Jim each receive a total salary of $250,000.This is paid as follows: $10,000 per month and $130,000 on December 31.Determine the amount of the salary deduction.

A vacation home rented for 200 days and used personally for 18 days is classified in the personal/rental use category.